Harrodian Instability and Induced Technical Change

This paper presents a demand-led growth model augmented with induced technical change to address the two Harrod's problems in growth theory. Building on recent developments in the supermultiplier literature, we investigate how both Harrodian instability problems can be resolved through two complementary mechanisms: (1) autonomous, non-capacity-creating demand components growing at an exogenous rate, and (2) endogenous technical change responsive to income distribution. While existing supermultiplier models show how autonomous expenditures stabilize demand-led growth, we integrate induced technical change into the determination of the natural rate of growth. The model achieves twin stabilization through the interplay of two stabilizing mechanisms: the supermultiplier and induced technical change. On the one hand, demand shocks are absorbed via adjustments in the investment share, allowing capital accumulation to align with the exogenously determined growth rate of autonomous expenditures. On the other hand, labor market imbalances trigger productivity adjustments that reconcile natural and warranted growth through changes in the wage share. This dual adjustment mechanism allows the system to sustain normal capacity utilization and stable employment rates, while preserving demand-led growth outcomes. The results suggest that incorporating induced technical change enhances the supermultiplier's capacity to address both of Harrod's instability problems within a unified demand-led framework.